What IPSAS 19 Is About
IPSAS 19 keeps the statement of financial position honest about uncertainty. It deals with three things that often look alike but are treated very differently: provisions, contingent liabilities and contingent assets. The standard sets out when a provision must be recognised, how it is measured, and what must be disclosed about the items that are not recognised.
The core principle
A provision is recognised only when a past event has created a present obligation, an outflow is probable, and the amount can be estimated reliably. If any of these is missing, there is no provision.
The Three Building Blocks
Define each term before using it, because the accounting follows directly from the definition.
| Term | Meaning | How it is treated |
|---|---|---|
| Provision | A liability of uncertain timing or amount | Recognised as a liability |
| Contingent liability | A possible obligation, or a present one that fails the recognition tests | Disclosed unless remote, never recognised |
| Contingent asset | A possible asset confirmed only by uncertain future events | Disclosed if inflow is probable, never recognised |
Provision, Payable or Accrual?
A provision is set apart by uncertainty. The closer the timing and amount are to being known, the more likely the item is a payable or an accrual rather than a provision.
| Item | Nature | Certainty |
|---|---|---|
| Payable | Invoiced goods or services agreed with the supplier | Amount and timing known |
| Accrual | Received but not yet invoiced, such as accrued leave | Estimated, low uncertainty |
| Provision | An obligation of uncertain timing or amount | High uncertainty |
Scope: What Is In and What Is Out
IPSAS 19 covers legal claims, environmental clean-up obligations, decommissioning and restoration costs, onerous contracts and restructuring provisions. Where another standard already deals with an item, that standard is used instead.
Handled by another standard
Employee benefits sit in IPSAS 39, social benefits in IPSAS 42, financial instruments in IPSAS 41, leases in IPSAS 43, and revenue contracts in IPSAS 47.
Recognising a Provision
A provision is recognised only when all three tests are met.
| Test | What it means |
|---|---|
| Present obligation | A past event has created a legal or constructive obligation |
| Probable outflow | It is more likely than not that resources will be needed to settle it |
| Reliable estimate | The amount of the obligation can be measured reliably |
Example 1: A disposal obligation
A 2025 environmental regulation, in force at 30 June 2025, requires a medical supplies authority to safely incinerate expired pharmaceuticals it already holds. It cannot avoid the cost. There are 40 tonnes to destroy at KSh 6,000 a tonne. All three tests are met: the law creates a present obligation over stock already held, an outflow is unavoidable, and the amount can be estimated.
40 tonnes x KSh 6,000 = KSh 240,000
Dr Disposal expense 240,000 Cr Provision for disposal 240,000
Where the Obligation Comes From
An obligation can be legal, arising from a contract, legislation or other operation of law, or constructive, arising from the entity’s own conduct. A constructive obligation exists where an established pattern or a specific public statement has created a valid expectation in others that the entity will accept a responsibility.
Example 2: Damage and a new law
A State Department’s depot contaminated nearby land in 2023, when there was no clean-up law. In June 2025 Parliament enacts a remediation law that applies to the existing damage, and the clean-up is estimated at KSh 18,000,000. Before the law, there was only a contingent liability. The new law is the obligating event for damage already caused, so at 30 June 2025 a provision of KSh 18,000,000 is recognised.
Dr Environmental remediation expense 18,000,000 Cr Provision for remediation 18,000,000
Provision, Disclose or Ignore?
The same set of facts leads to one of three outcomes, depending on how strong the obligation and the outflow are.
| Situation | Outcome |
|---|---|
| Present obligation, probable outflow, reliable estimate | Recognise a provision |
| Possible obligation, or outflow not probable | Disclose a contingent liability |
| Possibility of outflow is remote | No provision and no disclosure |
Contingent Liabilities and Contingent Assets
Neither is recognised. A contingent liability is disclosed unless the chance of an outflow is remote, and it is reassessed each period; if an outflow later becomes probable, a provision is recognised from that date. A contingent asset is disclosed only where an inflow is probable, and it is recognised only once the inflow is virtually certain, at which point it is no longer contingent.
Example 3: One lawsuit, two sides
A water company is sued by a contractor. The same case is a possible liability to the company and a possible asset to the contractor. If the company’s loss is probable and can be estimated, it recognises a provision; if only possible, it discloses a contingent liability. The contractor discloses a contingent asset if its win is probable, and recognises the asset and revenue only when the win is virtually certain.
Measuring the Provision
The amount recognised is the best estimate of what it would take to settle the obligation at the reporting date. The method depends on whether the entity faces many similar items or a single obligation.
| Situation | Method |
|---|---|
| A large population of items | Expected value: weight every outcome by its probability |
| A single obligation | The most likely outcome, adjusted if other outcomes skew higher or lower |
Example 4: A warranty (expected value)
A government medical laboratory warrants scanners it supplies. If all units had minor defects, repairs would cost KSh 1,000,000; if all had major defects, KSh 4,000,000. Experience shows 75% have no defect, 20% minor and 5% major. With a large population of units, the provision is the expected value.
(75% x 0) + (20% x 1,000,000) + (5% x 4,000,000) = KSh 400,000
Dr Warranty expense 400,000 Cr Provision for warranty claims 400,000
The Time Value of Money
Where the effect is material, the provision is the present value of the expenditure expected to settle the obligation. A pre-tax discount rate is used, reflecting current market conditions and the risks specific to the liability. Each period the discount unwinds, and that unwinding is recognised as a finance cost.
Example 5: Decommissioning in ten years
A State Department commissions a geothermal power plant it must dismantle and restore the site for in ten years. The estimated future cost is KSh 500,000,000 and the discount rate is 8%.
PV = 500,000,000 / (1.08^10) = about KSh 231,600,000
Dr Asset, decommissioning cost 231,600,000 Cr Provision for restoration 231,600,000
The initial cost is capitalised into the asset and depreciated. In year one the discount unwinds by about KSh 18,500,000 (231,600,000 at 8%), recognised as a finance cost.
Reimbursements
Sometimes another party will meet part of the cost, through insurance or an indemnity. The provision is still shown in full, because the entity remains liable for the whole amount. A separate asset for the reimbursement is recognised only when it is virtually certain to be received, and it can never exceed the provision. In the statement of financial performance, the expense may be shown net of the reimbursement.
Onerous Contracts and Restructuring
Two situations create provisions outside the usual cases.
| Situation | Treatment |
|---|---|
| Onerous contract | The unavoidable costs exceed the benefits; provide for the net least cost of exiting |
| Restructuring | Provide only with a detailed formal plan and a valid expectation raised in those affected |
| Restructuring, include | Only the direct costs necessarily entailed by the restructuring |
| Restructuring, exclude | Retraining, relocation, marketing and new systems, which relate to future activity |
No provision is made for expected future operating deficits, because they do not arise from a past obligating event.
Disclosure
The notes let a reader understand the nature, timing and amount of the items.
| Disclosure | What is shown |
|---|---|
| Reconciliation | Opening, additions, amounts used, unused amounts reversed, and the unwinding of the discount |
| Nature and timing | A brief description and the expected timing of outflows |
| Uncertainties | Major assumptions about future events |
| Reimbursements | The amount expected and any asset recognised |
| Contingent liabilities | Nature and financial effect, unless the outflow is remote |
| Contingent assets | Nature and financial effect, where an inflow is probable |
Common Mistakes
| Mistake | The correct position |
|---|---|
| Providing for future operating deficits | Not allowed; there is no past obligating event |
| Recognising a contingent asset before it is virtually certain | Disclose it only when the inflow is probable |
| Forgetting to discount a long-dated provision | Use present value where the time value is material |
| Netting an uncertain reimbursement against the provision | Show the provision in full; recognise the asset only when virtually certain |
| Treating a payable as a provision | A known, agreed amount is a payable, not a provision |
Key Lines to Remember
- A provision is a liability of uncertain timing or amount.
- Recognise it only with a present obligation, a probable outflow, and a reliable estimate.
- Contingent liabilities are disclosed unless remote; contingent assets only when an inflow is probable.
- Measure at the best estimate: expected value for many items, the most likely outcome for one.
- Discount long-dated provisions, and recognise the unwinding as a finance cost.
- Show a provision in full, and recognise a reimbursement only when it is virtually certain.
Practice Questions and Worked Solutions
Work each question before opening the solution. Figures are in KSh, and the probability percentages are teaching aids, not exact lines in the standard.
Question 1: Provisions
A 2025 environmental regulation, in force at 30 June 2025, requires KEMSA, a state corporation, to safely incinerate expired pharmaceuticals it already holds, and it cannot avoid the cost. At year-end it holds 40 tonnes of expired stock, and safe disposal costs KSh 6,000 a tonne.
Required: (a) using the recognition criteria, decide whether KEMSA recognises a provision, justifying each test; (b) state the amount and show the journal entry.Show worked solution
Present obligation? Yes. The law in force compels disposal of stock already held, so a past event plus the law create a present obligation.
Probable outflow? Yes. KEMSA has no realistic way to avoid paying.
Reliable estimate? Yes: 40 tonnes x KSh 6,000 = KSh 240,000.
All three tests pass, so a provision of KSh 240,000 is recognised.
Dr Disposal expense 240,000 Cr Provision for disposal 240,000
Question 2: Contingent liabilities
A State Department is sued by a supplier for KSh 25 million over a disputed contract. The legal advisers believe it is possible, but not probable (about 40%), that the case will be lost.
Required: (a) classify the item and justify it; (b) state the treatment at year-end; (c) explain what changes if the loss later becomes probable.Show worked solution
(a) The outflow is only possible (40%), not probable, so it fails the recognition tests. It is a contingent liability, not a provision.
(b) Disclose it in the notes: the nature of the case, the KSh 25 million exposure and the uncertainty. Recognise nothing. The outflow is not remote, so disclosure is required.
(c) If the loss later becomes probable and can be measured reliably, it becomes a provision, recognised from that date (Dr expense, Cr provision).
Question 3: Contingent assets
A county water company is suing a contractor for KSh 12 million for defective works, and its lawyers say recovery is probable. A year later the court rules in the company’s favour and the contractor’s insurer confirms payment.
Required: (a) state the treatment while recovery is only probable, with reasons; (b) state the treatment once payment is virtually certain, and show the journal.Show worked solution
(a) While recovery is only probable, it is a contingent asset: disclose it in the notes but do not recognise it, because gains that are not yet certain are never booked.
(b) Once the court has ruled and payment is virtually certain, it is no longer contingent. Recognise the asset and the revenue.
Dr Receivable 12,000,000 Cr Revenue / gain 12,000,000
Question 4: Onerous contracts
A public university signed a three-year lease for office space it has now vacated and cannot use or sublet. The remaining unavoidable lease payments total KSh 2.4 million, and the landlord will accept an early-exit penalty of KSh 1.8 million to cancel the lease.
Required: (a) explain why this is an onerous contract; (b) compute the provision and show the journal.Show worked solution
(a) The space is vacated, so the benefit is nil while unavoidable costs remain. The unavoidable cost exceeds the benefit, so the contract is onerous.
(b) Provide the lower of the cost to fulfil (KSh 2.4 million) and the cost to exit (KSh 1.8 million), which is KSh 1.8 million.
Dr Onerous contract expense 1,800,000 Cr Provision for onerous contract 1,800,000
Question 5: Warranties (expected value)
A government medical laboratory warrants the scanners it supplies to public hospitals. From experience, 75% of units have no defect; 20% have minor defects costing KSh 1 million in total if they all occurred; and 5% have major defects costing KSh 4 million in total if they all occurred.
Required: (a) compute the warranty provision using expected value; (b) show the journal.Show worked solution
(a) A large population of units, so use expected value.
(0.75 x 0) + (0.20 x 1,000,000) + (0.05 x 4,000,000) = KSh 400,000
Dr Warranty expense 400,000 Cr Provision for warranty claims 400,000
Question 6: Discounting and decommissioning
A State Department commissions a geothermal power plant that it is legally required to dismantle, restoring the site, in 10 years. The estimated future cost is KSh 500 million and the discount rate is 8% (1.08 to the power 10 is about 2.159).
Required: (a) compute the provision at initial recognition; (b) show the initial journal; (c) explain how it changes each year and compute the year-one effect.Show worked solution
PV = 500,000,000 / 2.159 = about KSh 231,600,000
(b) The decommissioning cost is capitalised into the asset’s cost under IPSAS 45, not expensed now.
Dr Asset, decommissioning cost 231,600,000 Cr Provision for restoration 231,600,000
(c) Each year the discount unwinds: year one is 231,600,000 at 8%, about KSh 18.5 million, recognised as a finance cost (Dr finance cost, Cr provision). The provision grows towards KSh 500 million by year ten.
Question 7: Reimbursements
A state corporation must pay KSh 10 million to clean up a fuel spill, for which a provision has been recognised. It holds insurance, and the insurer has virtually certainly agreed to reimburse KSh 7 million.
Required: (a) state the provision; (b) explain how the reimbursement is treated and its amount; (c) explain how the expense may appear in performance.Show worked solution
(a) Recognise the provision in full at KSh 10 million, because the corporation remains liable for the whole amount.
(b) Recognise the reimbursement as a separate asset of KSh 7 million, since it is virtually certain and within the KSh 10 million cap.
(c) In the statement of financial performance, the expense may be shown net: KSh 10 million cost less KSh 7 million recovery, which is KSh 3 million.
Dr Clean-up expense 10,000,000 Cr Provision for clean-up 10,000,000Dr Reimbursement receivable 7,000,000 Cr Clean-up expense 7,000,000
Question 8: Restructuring
A Ministry approves and publicly announces a detailed plan to close a regional office, creating a valid expectation among the staff affected. Expected costs are KSh 15 million in staff severance, and KSh 4 million to retrain and relocate staff who will continue working in other offices.
Required: (a) state the conditions for a restructuring provision; (b) compute the provision, with what is included and excluded; (c) show the journal.Show worked solution
(a) A restructuring provision needs a detailed formal plan and a valid expectation raised in those affected, by announcing or starting it. Both are met here.
(b) Provide only the direct costs necessarily entailed: the KSh 15 million severance. Exclude the KSh 4 million retraining and relocation of continuing staff, which relates to future activities. The provision is KSh 15 million.
Dr Restructuring expense 15,000,000 Cr Provision for restructuring 15,000,000
